Customers for Life

FOR SEVERAL MONTHS now, I have been talking with Mike Morgan/Morgan Florida, a real estate broker serving the Treasure Coast area of Florida. In our most recent conversation, Morgan tells me, “Prices have already fallen 10%, regardless of what median prices show. In addition, transaction volumes have fallen off the cliff.”

Unlike other brokers I have talked to, Morgan is expecting “further declines in the neighborhood of 20% or so, more on condos.” He is advising his clients that “the market has changed and that sellers must accept that reality if they want to get their house sold.” Realtors openly telling their clients to expect substantial further declines simply is not the norm.

Back in January and February, Morgan said, “Centex was so desperate to close deals before their March 31 fiscal year end they were offering $60,000 select home sites that were not selling well. But that is just the start of it. Centex was also offering 6% commissions to the agency booking the sale, plus an additional $10,000 selling bonus to top it off.”

Obviously, Centex was under extreme pressure to unload some properties ahead of its fiscal year end. A year or so ago, builders were offering 1-2% at most to outside agents. Some homebuilders would not work with outside agents at all. On a $400,000 home, that is an extra $24,000 in lost profit compared with six months or a year ago. Factor in the $60,000 off then add in a $10,000 bonus and Centex made a whopping $94,000 less on those home sales than expected.

Those deals are now gone, but I suspect Centex and others will be forced to put them back on. The reason median prices have not come down that much is that builders are booking the full value of the sale before these discounts were granted and calling that the sale. Discounts are attributed to advertising. Prices are now biased on the high side, just as they were biased on the low side on the way up. Morgan assures me that “comparable prices have fallen 10% or so,” regardless of stats that show otherwise.

Rising inventories are going to continue to add downward pressure on prices. Sentiment was steadily falling from August-December, but a sudden steep falloff in January and February (peak season in Florida), seems to have caught nearly everyone by surprise. Morgan was ahead of the curve by advising his clients to “take a little less” in November and December to “get the deal done.” It seems that was sound advice.

How Does a Realtor Survive?

“How does a realtor get business in this type of environment?” I asked Morgan. He explained there are three kinds of realtors:

1. Those that tell a customer what he wants to hear just to get the listing.2. Those that tell a customer the simple hard truth.3. Those that prey on the insecure, hoping to profit from a quick sale.

Morgan himself is losing business because he will not list houses for what the prospective client “needs to get out of it.”

Now, that’s a scary thought: Clients “need a price” that the market simply will not bear. With all the cash-out refis used to support consumption, more and more people are going to be trapped upside down in their homes, unable to sell them.

Is there any point in taking a listing in this environment if the house is overpriced? “It is a waste of time and energy” for the seller and the agent both, says Morgan. “Why bother?” At best, there will be a loss of time, but the real risk is “walking the market down.” Here is a typical example: A customer asks for $380,000, when he could only get $350,000. The house sits for two months and the customer now is willing to take $350,000. Oops, it’s too late. The market price now is $335,000, but the customer wants $350,000, a price he could have received two months ago, but cannot get now. This process continues until the house is priced correctly or the seller needs to get more out of it than the market will bear and the listing is pulled.

Still, Morgan tells me that he is doing deals when others are not. I asked him how. He gave me an example using Centex. Centex offered $60,000, but that still was not enough to entice buyers, so in several cases he gave his clients half of his $24,000 commission and half of that $10,000 selling bonus, too. Those clients got houses for $22,000 cheaper than the discount offered by Centex. In effect, Morgan cushioned his clients against an extra 6-7% price decline. Who else is doing that, I wonder?

Like all brokers, Morgan goes over recent sales and active listings. One thing he is doing that others are not is showing clients pending sales. Recent sales of even one or two months ago can be hopelessly out of date in a fast market. Pending sales are more likely to give a buyer or seller a better idea of what something is going for now.

When it comes to listing houses for his clients, he is recommending selling bonuses and very competitive initial asking prices, to make sure the house gets shown. He is willing to give up his split of that selling bonus to get a deal closed. “With skyrocketing inventories, one must do something to stand out,” he said.

I thought about this for a while and it became obvious to me that Morgan is attempting to create “customers for life” by treating them more fairly than necessary to get their business. Will they remember that? You bet.

How many places truly understand the value of a customer anymore? “Service” is now a buzzword. It hardly exists in practice. Proof of that is easy to come by. Call the customer service phone number of any company and it is likely you will go through two minutes of automated voice transfers just to get to the wrong department.

In the short term, it might seem that Morgan is losing tens of thousands of dollars commission per sale. But is he really? By sharing his commission with buyers he might be closing a deal that otherwise might still be sitting on the table. Short term, half a loaf is better than none. Long term, he is building up a client list for repeat business and referrals down the road. How many word-of-mouth customer referrals is he going to get by doing business the way he is?

Revised splits, selling bonuses, splitting commissions with clients, insistence on realistic pricing, and willingness to take half a loaf are what it is going to take to survive the bust. Those flexible enough to do that will be building customers for life.

The Mortgage Business

As long as we are on the subject of treating customers fairly, I may as well address one of the questions that people send me from time to time regarding a link to No Bull Mortgage on my blog. The typical question goes something like this: “Mish, why are you sponsoring a mortgage company on your blog when you think an enormous real estate bust is coming?”

The answer is simple. I have known Dave Donhoff, the owner of No Bull Mortgage, for years, and I know he treats his customers fairly. Regardless of what I think is about to happen to home prices, some people simply want to buy a home. Unlike other places, Donhoff does not steer his clients to pay option arms to make an extra percentage for himself. If a client is stretching too much for a house, Donhoff will come out and say so, and if Donhoff does not believe a “stated income,” he will point out the consequences of stretching the truth: potential bankruptcy, as well as a possible fraud conviction. Like Morgan, Donhoff is attempting to build customers for life by watching out for their best interests. In the end, both Donhoff and Morgan have aligned their best interests with their customers’ best interests. There is simply no better way to build a business.

Compare and contrast those examples with a letter I just received from WeDoLend. A clear window on the envelope was big and bold: “RE: Merrill Lynch Credit Corp.” It appeared I was getting some sort of update from Merrill Lynch about my mortgage. It was anything but. The letter itself started of with, “I have good news…in addition to the mortgage obtained fromMerrill Lynch Credit Corp., you qualify for a fantastic opportunity…guess what? A new loan enables you to skip a mortgage and have no out-of-pocket closing costs.” The bolding is theirs, not mine.

Only in the fine print was it disclosed that what is being offered is a pay option arm, and only in the fine print was it disclosed that the offer was not from Merrill Lynch at all. I did call Merrill Lynch and they had already received several calls from customers, but I was the only one that got to the fine print disclosing the details. Apparently, this nonsense is perfectly legal, but what word better describes this kind of attempt to build customers than “sleazy”? It is all too typical of the anything-for-a-buck crowd, and there are probably going to be a lot of suckers taken in by this ruse. I really do not know how some of these lenders can sleep at night. If I can do my part to steer people away from places like that, I consider it time well spent.

In the interest of full disclosure, I do not get a thing from Mike Morgan should any customers find him as a result of this article. However, I may make a token amount if someone clicks on the link from my blog to No Bull Mortgage and takes out a loan through them.

I need to point out two things about this arrangement:

1. My relationship with No Bull Mortgage is in full compliance with the Real Estate Settlement Procedures Act (RESPA).2. To date, I have not earned a single dime from it and I am not sure I ever will. I simply do not expect many people reading about economic bust theories to be clicking on ads for a mortgage lender.

As long as we are in full disclosure mode, I have not made over $350 combined total in over a year’s time off of the ads on my blog. It certainly is not a get-rich-quick scheme. For those who think there are lucrative advertising revenues to be had from blogging, rest assured that is not the case, at least not in my experience.

I did readCustomers for Lifein 1990. The author is a luxury car dealer from Texas. The book details his experiences in selling cars. However, his book is no more about cars than this post is about houses. Sewell’s advice is as true today as it was then.

Sewell asks the question: “Are we going to make an extra effort for someone who might buy 20 cars from us? You bet.” If you are in mortgages, ask yourself what you are going to do for someone who might buy 2-3 houses from you over the course of his life, in addition to recommending you to 10 other people who might do the same. Are you doing anything special for them?

Let’s compare those ideas with the real estate market today. A real estate agent can no longer just stick a sign on a lawn and expect to get a sale, nor can a builder just put up a tower and be flooded with condo buyers. Those days are long gone, and builders and agents alike better be prepared for it. Competition for customers of all kinds is increasing, and that goes well beyond the housing slowdown. Look no further than GM taking it on the chin from Toyota. I expect increased competition for dwindling customers will quickly extend beyond real estate and auto dealerships into nail parlors, upscale beauty salons, and even lawn care services.

Whether or not you are in sales, everyone has “customers” to take care of. I was in the banking industry for over 15 years, but never sold a thing. My “customers” were end users in the credit card business. If you have not done so already, it’s time to figure out who your customers are and what new customers you want (if any), and make sure you take care of them better than your competition does. Your economic survival may depend on it.

Regards,

Mike Shedlock ~ “Mish”April 14, 2006

The Daily Reckoning

You May Also Be Interested In:

About Michael Shedlock:

Mike Shedlock (Mish) is a registered investment advisor representative for SitkaPacific Capital Management. His blog Mish’s Global Economic Trend Analysis includes commentary every day of the week. Mike is also a contributing “professor” on Minyanville.